"Unrestricted earnings should be retained only when there is a reasonable prospect -- backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future -- that for every dollar retained by the corporation, at least one dollar of market value will be created for owners," Buffett wrote in his 1984 letter to Berkshire shareholders.

Buffett's billion-dollar secret ... exposed!The emphasis is Buffett's, not ours. But we heartily agree. Businesses that don't pay dividends should have a plan to produce massive returns with every dollar of retained capital -- the sorts of returns Buffett and Munger have spent decades delivering to their own shareholders.

Massive is too small a word to describe Berkshire's gains. Let's go with "ginormous" instead. Here's why: Buffett, Munger, and their top-notch managers have engineered a 20% annual return on Berkshire's per-share book value since 1965. All but three of those years (1965 through 1967), the company retained all earnings, paying no dividends.

Unfair, you say? Unethical? Name a multibillion-dollar conglomerate that pays a 20% annual yield, and you can join the chorus of sourpusses who demand that Buffett and Munger pay a dividend. Let us know when you find one.

Actually, let us save you the trouble; there aren't any. You'd have to scour the small- and mid-cap ranks just to find 10% yielders that have a history of increasing their payouts to shareholders.

The list includes just seven names, such as Anworth Mortgage (NYSE: ANH) and MFA Financial (NYSE: MFA) . All are structured as dividend vehicle trusts, and many should be considered cyclical, because their earnings are largely at the mercy of changes in interest rates.

That's our money, palAs we see it, Buffett's dividend policy is actually a boon for shareholders. He likens us to bankers, entitled to a return on the capital borrowed from us when we invest. Dividend payments are the default, made in lieu of a proven history of effective use of capital.

In stark mathematical terms, this means capital allocation laggards such as OfficeMax (NYSE: OMX) ought to be paying dividends. This home furnisher last earned more than 6% on its available capital in 1999, with returns running around 4% or so.

Compare that with Domino's Pizza, a pizza delivery pioneer that's also a non-payer. The difference here is that management has proven itself; Domino's has earned more than 20% a year on its capital since 1999. The company has earned the right to be stingy.

Neither Buffett nor Munger is immune from this test. Remember: Berkshire spent 1965 to 1967 paying dividends, and in the ensuing decade would produce better-than-40% returns four times in 10 years.

Dividends helped produce those returns, and they're still helping Buffett and Munger today. Have a look at these yields on Berkshire's 10 largest holdings:

Sources: Capital IQ, Yahoo! Finance, and authors' calculations.*Data as of June 30 for all except Munich Re, the holdings for which were disclosed on Oct. 14, and Wesco, disclosed Sept. 1.

In every case, Buffett and Munger bet on these stocks because they were reflective of superior businesses. We know this because we've seen their shareholder letters. Coca-Cola's sugar water is a daily staple for billions of people, including Buffett. Wal-Mart helps feed and clothe millions with cheap groceries and goods. And Johnson & Johnson's health-care products are widely used around the world.

Buffett also took advantage of the last few years' market insanity to buy preferred shares of General Electric and Goldman Sachs that pay Berkshire Hathaway $800 million in annual dividends.

This deal is so good that Buffett noted in an interview that the Goldman investment alone is paying Berkshire almost $1,000 per minute the company doesn't repurchase his investment. "So I try not to answer the phone if I think Goldman's calling," Buffett said.

This matters more than you may think. Buffett and Munger measure themselves against the return of the S&P 500, an index that yields 1.9% as of this writing. Berkshire earns a good deal more than that.

Consider that for a moment: Buffett and Munger, two superinvestors who need no extra advantages, are already starting with a lead on Mr. Market. They're using dividends to rig the race in their favor.

You can, tooIf Buffett's approach makes sense to you, and you're looking for further guidance on how to build a diversified portfolio that's anchored by strong dividend payers, check out our real-money Million Dollar Portfolio service. Lead advisor Ron Gross and his team have opened the portfolio to new members for a limited time. Enter your email address in the box below to find out more.

This article was first published Sept. 24, 2009. It has been updated.

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The author ignores the basic Berkshire Hathaway conundrum, that investors realize no gain on the shares at all until they sell them, something Mr. Buffett advises against. By Buffett's miserly outlook, his admirers end up the richest people in the graveyard.